Environmental, social, and governance (ESG) is a framework designed to be integrated into an organisation’s strategy to create enterprise value. It expands the organisational objectives to include identification, assessment and management of sustainability-related risks and opportunities with respect to all organisational stakeholders and the environment.
ESG risks affect the global community, environmental risks being of most concern over the next 10 years. According to the World Economic Forum’s global risks perception survey of 2021/2022, failure to act on climate change, extreme weather, biodiversity loss, human environmental damage and natural resource crises are among the top 10 ESG risks around the world.
ESG Risks in South Africa
In South Africa, ESG risks are becoming more severe and impact the insurance industry. This includes severe weather conditions, such as the KwaZulu-Natal floods of April 2022. The estimated cost of this event alone is R17 billion. Severe weather patterns can also lead to more potholes and fires. Discovery Insure’s data shows that there has been a 31% increase in pothole claims and a 115% increase in fire claims in 2022 compared to 2021.
Weather patterns are, however, still predictable. For example, historical data can be used to predict the occurrence of La Niña in 2022. So, insurers might do well to think about weather events differently and prepare ahead for these events by offering the right cover for their clients as well as introducing innovative ways to protect against weather risks.
We have also seen an increase in car parts inflation, leading to an increase in used car price inflation. Discovery Insure’s data shows that average inflation was four times higher in 2021 than it was in 2020 across both car part costs and used car prices. Loadshedding, another ESG risk in South Africa, poses a great challenge to social interactions as 43% of people say they cannot get through the day without using their cellphone. We have also seen that loadshedding impacts power surge claims. In the past year, power surge claims have increased by 120%.
A big governance issue in South Africa that is often overlooked is cyber security governance. Although policies like the National Cyber Security Framework (NCSF) and the Protection of Personal Information Act (POPIA) were created, implementation of these policies is slow. The result is that South Africa lags behind advanced economies when it comes to cybersecurity legislation, and individuals and businesses alike remain at risk of cyber security breaches.
Time to get creative
The prevalence of ESG risks and their increasing severity in South Africa presents an opportunity for insurers to introduce innovative benefits, such as boosting a car’s retail value by a set percentage when determining the sum insured for the car, comprehensive cyber insurance, cover for power surge losses (including those resulting from loadshedding) and charging car insurance premiums based on the monthly distance driven by the client.
Insurers can also collaborate with the government on relevant social initiatives that help clients mitigate some of these risks. For example, some insurers assisted with vaccination programmes with many of them providing vaccination sites. In other examples, Discovery Insure, together with Dial Direct, is fixing potholes around Gauteng through their Pothole Patrol initiative. Discovery Insure is also helping to fight fires through Fire Force, which offers private fire response to clients around the Johannesburg area. These initiatives help to keep clients safe and therefore reduce claims, resulting in insurance savings. They also keep society safe.
Intermediaries are key
Research shows that insurance clients trust their intermediaries when it comes to their insurance needs, with 42% of those surveyed saying they rely on their intermediary to help them get the best cover for their needs.
Intermediaries can also assist clients to understand their risks through comprehensive risk assessments by using data analytics and the latest technology. Therefore, intermediaries are key to helping insurance clients navigate the current ESG environment and plan for the future. There has never been a more opportune time for the intermediary to show their value as a risk coach to their clients.